The Global Financial Cycle, Bank Capital Flows and Monetary Policy. Evidence from Norway

39 Pages Posted: 23 Feb 2018

Date Written: February 19, 2018

Abstract

We investigate the importance of a global financial cycle for gross capital inflows based on monthly balance sheet data for Norwegian banks. The VIX index has been interpreted as an "investor fear gauge" and associated with a global financial cycle. This index has also been found to impact real activity. We include both a global activity variable and the VIX index in our structural VAR model of capital inflows. We find that when global activity falls, banks' foreign funding share falls. Our results suggest that global real activity rather than a global financial cycle is a main driver behind the volume of bank capital inflows. We also study domestic monetary policy and implications for capital flows. Domestic monetary policy helps absorb VIX shocks and there is no indication of procyclical ("carry trade") effects on funding. Monetary policy affects activity and inflation in a standard fashion, and the exchange rate acts as a buffer when shocks hit the economy.

Keywords: Bank Capital flows, Uncertainty-shocks, Structural VAR

JEL Classification: E32, E44, F32, F62, G15

Suggested Citation

Alstadheim, Ragna and Blandhol, Christine, The Global Financial Cycle, Bank Capital Flows and Monetary Policy. Evidence from Norway (February 19, 2018). Norges Bank Working Paper 02/2018, ISBN: 978-82-8379-022-1, Available at SSRN: https://ssrn.com/abstract=3128250 or http://dx.doi.org/10.2139/ssrn.3128250

Ragna Alstadheim (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Christine Blandhol

Princeton University ( email )

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